China's plans for steady growth and more reform ..... everybody convinced ?

Wednesday 4th November 2015

 

China's plans for steady growth and more reform ..... everybody convinced ?

 

Ref : "How China's Best Laid Plans Could Go Astray", The Wall street Journal, Online.

President Xi Jinping has recently unveiled China's 5-year plan for the years 2016 - 2020. Its stated aims are unquestionably laudable and no one should ever be in doubt over the determination of Chinese authorities to achieve their goals, but the success of the plan requires certain assumptions that not everybody is prepared to make.

The salient points that have raised a few eyebrows are that annual growth over the period must be at least 6.5%, that capital controls will be relaxed and that the Yuan "will become a convertible and freely usable currency".

 The new growth target is marginally lower than the previous one of 7.0%, but for many this is still an unrealistic target  --  not least because they believe the true current rate of growth to be considerably lower than the official measure of 6.9%. Not only that, but they are sceptical that as the emphasis in the economy switches, the new boom areas of private-sector services and consumption will be able to take up the slack created by the decline in construction and heavy industry.

 Also of concern to the doubters is the fact that broadcasting a specific growth target will only increase the temptation for officials to fudge the numbers in order to meet it. The argument is also being made that even if you were to take the numbers at face value, the pressure to achieve 6.5% growth would prompt the government to instigate infrastructure projects and other forms of stimulus that it can no longer afford, and thus open up the possibility of a more painful adjustment at a later date.

As to relaxing capital controls and freeing up the currency ..... well, China has already made some steps in this direction but the cynics would argue that it has done so largely to meet the conditions of getting the Yuan accepted by the IMF as a reserve currency  --  an ambition that looks like being fulfilled before long, incidentally. Official actions in the aftermath of the Yuan devaluation and partial float, and of the stock market rout,  may well be a more accurate guide to where the authorities stand on these matters : unwilling to allow capital outflows to jeopardise the economy and banking system, and more than prepared to intervene against unwelcome market developments.

The suspicion is that Beijing is a long way from being far enough down the road to reform to allow the markets free rein, and instinctively retains the desire to assert its control. It's in that light that some would question China's ability to match its actions to the rhetoric.